BLBG: Treasuries Fall as Fed Officials Signal Probable 2015 Rate Boost
Traders are pricing in a 49% chance of December liftoff
Declines may be limited as focus turns to economic data
Treasuries declined, halting two days of gains, as Federal Reserve policy makers including San Francisco Fed President John Williams laid out the case for an interest-rate increase this year after leaving the benchmark unchanged last week.
“I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” Williams said on Sept. 19 in Armonk, New York. Fellow Fed officials James Bullard and Jeffrey Lacker also explained their rationale for potentially raising rates at one of the Federal Open Market Committee’s two remaining meetings of 2015, citing declines in unemployment and other gains in the U.S. economy.
“We have Williams out over the weekend reaffirming a more optimistic message than what the market walked away with from the FOMC last week,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “That has helped arrest the Treasury rally for now, at least until we get more data.”
The benchmark U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 2.16 percent as of 6:08 a.m. New York time, according to Bloomberg Bond Trader data. The yield dropped 16 basis points over the previous two days. The 2 percent note due August 2025 fell 6/32, or $1.88 per $1,000 face amount, to 98 5/8 on Monday. The yield touched 2.12 percent earlier, matching the lowest level since Sept. 8.
Treasuries began trading at 7 a.m. in London after being closed in Japan for a holiday. Futures contracts on the Standard & Poor’s 500 Index of shares rose for the first time in three days, climbing 0.2 percent.
Economic Data
Further declines in Treasuries may be limited this week as economists forecast data this week may show growth has slowed.
Existing home sales fell 1.6 percent in August from the month before, based on a Bloomberg survey of economists before the National Association of Realtors reports the figure on Monday. Sales climbed at an annual pace of 5.59 million units in July, the highest level in eight and a half years. Initial jobless claims rose 11,000 last week to 275,000, according to the median of analysts’ forecasts compiled by Bloomberg before the data are released on Sept. 24.
The Fed finished a policy meeting last week by holding interest rates unchanged, showing a reluctance to end an era of record monetary stimulus in a time of rising international risks and slow inflation. While a majority of traders and analysts expected the central bank to stand pat, firms such as BlackRock Inc. and JPMorgan Chase & Co. said the big surprise came from the FOMC’s unusually dovish statement.
Fed Outlook
In it, policy makers highlighted the growing risk that global economic and financial events could hold back U.S. growth and put more “downward pressure” on inflation -- even as they played up job gains and improvements in household spending. The Fed is worried about events abroad “to a degree that we hadn’t seen before,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock, which oversees $4.4 trillion.
Traders are now pricing in a 49 percent probability of the Fed raising the benchmark rate by its December meeting, compared with 64 percent on Sept. 16 before the policy decision.
Treasuries returned 1.3 percent this year, outperforming German government securities, which gained 0.4 percent, according to Bloomberg World Bond Indexes. U.K. gilts earned 1.4 percent.
